Finding finance from venture capital.
There are companies out there that under certain conditions, are prepared to invest in your company or your business idea in exchange for shares in your company.
Typically they will review your business plan and interview the management team or owner. They are not there as a charity. Their job is to find profitable companies early on and make a profit by selling their shares in the company within a few years.
This is not easy finance to get hold of. You will need to convince some very experienced and street smart people that:
- Your business will be making returns for them in excess of 30% per year.
- You or your team have the necessary skills and experience to make your venture a success.
- Your business idea is reasonably unique, if not ground breaking, so that its chances of success are improved.
- You are also taking some form of financial risk in this venture.
Typically they will want some sort of influence in the running of the business. Normally this is done through membership on the board of directors, but can also be through the use of a business mentor supplied by the venture capital firm.
A frequent advantage of this type of finance is that they will often supply missing skills and experience if they buy into your idea. An example is the supply of a business mentor who can guide you through the early days of your business. This of course seldom comes without a fee.
The biggest disadvantage of this type of finance is that you may not have full control on how your company is run. This could become frustrating if you and the financier believe in different paths which the company should be taking.
Careful consideration should be given to who the venture capital company can sell their shares to when they want to get out. If your new partner is your competitor or someone who you do not get on with, this could make your business life difficult.
That aside, venture capital is a fantastic means to get finance if you have the right type of business idea.
The two most well known venture capital companies in South Africa are: Business Partners and Here Be Dragons (HBD).
Another option is to look at the website GoBigNetwork.com which allows you to list your idea. Venture capitalists and what they call angel investors are then given the opportunity to pick and choose their best investment opportunities. Worth a try.
The term venture capital is also used when financial institutions supply finance for management buy outs of the company and for BEE deals. This, in our humble opinion, is not true venture capital and is typically done by financial houses looking for low risk investments. As an entrepreneur we are sure you are aware that small business is seldom “low risk”.